Länsförsäkringar Sak Försäkrings AB Annual Report

Transcription

1 2010 Länsförsäkringar Sak Försäkrings AB Annual Report

2 Contents 2010 in brief in brief 4 Board of Directors Report 8 Proposed appropriation of profit 10 Five-year summary 11 Financial statements 12 Income statement 14 Balance sheet 15 Statement of changes in shareholders equity 15 Cash-flow statement 16 Notes to the financial statements 39 Audit Report 40 Board of Directors and auditors Net profit for the year before appropriations and tax amounted to SEK 518 M (511). The technical result for the insurance operations amounted to SEK 218 M (375). The total return on investment assets was 4.3% (6.4). Continued focus on the market for health insurance products. Länsförsäkringar Sak is a market leader in health care insurance in Sweden with a market share of 31%. Länsförsäkringar in brief Länsförsäkringar comprises of 24 local and customer-owned regional insurance companies and the jointly owned Länsförsäkringar AB. Customers are provided with a complete offering of banking and insurance services through the regional insurance companies. Animal and crop insurance is offered through Agria Djurförsäkring and total solutions for reliable mortgage transactions are offered through Länsförsäkringar Fastighetsförmedling. The basis is local presence and decision-making experience has proven that local decision-making authority combined with joint strength create substantial added value for customers. Long-term respect for customers money is also fundamental to Länsförsäkringar, there are no external shareholders and it is not Länsförsäkringar s money that is being managed but its customers. This approach characterises the entire business. Länsförsäkringar has almost 3.4 million customers and approximately 5,800 employees. 24 regional insurance companies 91.4% (through 20 regional insurance companies) 96% 88.9% 99.96% Humlegården Länsförsäkringar Mäklarservice 9.3% Länsförsäkringar AB 0.04% 14 local insurance companies 4% Länsförsäkringar Fastighetsförmedling 100% 8.6% Länsförsäkringar Sak Försäkrings AB Länsförsäkringar Liv (life assurance) 1.8% Länsförsäkringar Bank 100% Wasa Försäkring Run-Off Agria Djurförsäkring Länsförsäkringar Grupplivförsäkrings AB LF Sak Fastighets AB Utile Dulci 2 HB 2 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

3 I am now looking forward to an exciting future in the years ahead with developments in new areas. PRESIDENT S COMMENTS Highly skilled and ambitious employees create many opportunities for the future According to Länsförsäkringar s strategy, Länsförsäkringar Sak s task is to launch new products to secure new business that can subsequently be channelled through the companies and to supplement the regional insurance companies offerings with specialist products to meet customer requirements. In addition, the company conducts reinsurance activities and the subsidiary Agria Djurförsäkring conducts animal and crop insurance. Motor insurance was a business area that was conducted in Länsförsäkringar AB and subsequently channelled to the regional insurance companies, and in the future, health insurance will be a new such development area. The success of Länsförsäkringar Sak is based on ambitious employees with specialist expertise and great interest in the development of the market. Länsförsäkringar is currently a market leader in health insurance, with a market share of 31%. During the year, the products in this area were streamlined to simplify the offering and reduce claims costs. As a market leader, we are responsible for ensuring that the products demanded and required by customers function efficiently in the long term. The area of health insurance previously experienced profitability problems but results have now been improved. I am looking forward to the potential reforms that might arise in social insurance. The progress of the Swedish government s Social Insurance Inquiry is being monitored and Länsförsäkringar is actively involved in the Worksmens Compensation Insurance Commission through the Swedish Insurance Federation. We believe that new and sustainable solutions can be developed through interaction between the public and private sectors in the area of social insurance, which is positive for customers and society as a whole. The regional insurance companies have a broad range of products and services to offer their customers, although the handling of some products are not efficient to handle in a local company. This is where Länsförsäkringar Sak has a role to play in offering supplementary insurance to further broaden the product range. As a result, Länsförsäkringar Sak conducts business operations in the areas of liability, cargo, motor, accident, and environmental to meet customer needs. An increasing number of customers are choosing to move parts of their operations outside Sweden and Länsförsäkringar Sak can offer solutions in cooperation with its international partner INI. This is a business area that will become more important in the future. Recycling insurance and an insurance for wind-power mills are investments being made to contribute to a better environment. A fundamental basis for conducting insurance operations is a solid reinsurance cover. The Länsförsäkringar Alliance s reinsurance solutions have been managed jointly since 1936 in Länsförsäkringar Sak. We have also been underwriting international assumed reinsurance for many years. The higher rate of disaster claims globally illustrates how essential reinsurance cover is. Intensive activities were initiated during the year to adapt to the Solvency II regulations. Going forward, we will work just as intensively to implement these changes in our operations. The regulations will benefit both the company and our customers in the future, but we need to find a reasonable balance between reporting requirements and providing heightened security for customers. Over the years, Länsförsäkringar Sak has accumulated vast experience in establishing business based on customer needs and subsequently channelling business to the regional insurance companies in close customer meetings. I am now looking forward to an exciting future in the years ahead with developments in new areas. Ann Sommer President of Länsförsäkringar Sak LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 3

4 Board of Directors Report The Board of Directors and the President of Länsförsäkringar Sak Försäkringsaktiebolag (publ), Corporate Registration Number , hereby submit the annual report for the 2010 fiscal year. The registered office of the company is in Stockholm. Consolidated financial statements were not prepared with reference to Chapter 7, Section 2 of the Swedish Annual Accounts Act, since the company and its subsidiaries are covered by the consolidated financial statements for Länsförsäkringar AB (publ), Corporate Registration Number Figures in parentheses refer to the preceding year. Ownership Länsförsäkringar Sak Försäkringsaktiebolag (publ) (referred to below as Länsförsäkringar Sak) is wholly owned by Länsförsäkringar AB (publ), which in turn is owned by 24 regional insurance companies and 14 local insurance companies. Organisation Länsförsäkringar Sak is the Parent Company of Försäkringsaktiebolaget Agria, Länsförsäkringar Grupplivförsäkringsaktiebolag, Länsförsäkringar Sak Fastighets AB, the limited partnership Utile Dulci 2 HB. During the year, the subsidiary Länsförsäkringar EFEL Skadeförsäkring was merged with the Parent Company Länsförsäkringar Sak and the subsidiary Länsförsäkringar EFEL Livförsäkring AB was liquidated. Focus of operations Länsförsäkringar Sak conducts non-life insurance operations. The majority of non-life insurance in the Länsförsäkringar Alliance is underwritten in the local regional insurance companies with local concessions. However, Länsförsäkringar Sak also conducts certain development-related operations, primarily pertaining to non-life insurance business. In 2010, business was underwritten in the areas of sick leave, health care, accident, producer liability, property, cargo and professional liability insurance. In addition, insurance cover is provided for nationwide customers in the commercial auto area (third-party liability insurance and motor hull insurance). The company also handles the Länsförsäkringar Alliance s internal and external reinsurance and underwrites assumed international reinsurance. The provision for claims incurred for motor third-party liability insurance underwritten up to and including 2003 is run off within Länsförsäkringar Sak. As of 2004, this type of business is underwritten by the regional insurance companies. Länsförsäkringar Sak s subsidiary Försäkringsaktiebolaget Agria is a specialist company for animal and crop insurance. The subsidiary Länsförsäkringar Grupplivförsäkringsaktiebolag underwrites group life assurance and employment group life assurance. Market The non-life insurance market during the year was characterised by fierce competition and price pressure despite the effects of the financial crisis waning and investments rising again. The health care insurance market continued to expand, but growth slowed and was at slightly more than 6% according to the most recent study. Länsförsäkringar is a market leader, with a market share of 31%. Growth is primarily seen in such areas as Länsförsäkringar Sak s core target groups, and small and medium-sized businesses. Competition in the market is intensifying since more and more companies are realising the growth potential that exists and are establishing operations. The market continues to be exposed to competition from major traditional competitors, banks launching non-life insurance operations, new players and foreign companies. In addition to an increasing number of players establishing themselves in the non-life insurance market, additional sales channels are being developed, and the role of the Internet and brokers continues to become more significant. Efficiency enhancements to reduce operating expenses are becoming increasingly important to retain competitiveness. Significant events during the year Merger and liquidation of subsidiaries In December 2009, Länsförsäkringar EFEL Livförsäkring AB s entire insurance portfolio and accompanying insurance assets and liabilities were transferred to the fellow subsidiary Länsförsäkringar Grupplivförsäkringsaktiebolag. Since Länsförsäkringar EFEL Livförsäkring AB no longer conducts any business activities, the Annual General Meeting resolved that the company would immediately go into voluntary liquidation. The liquidation process was completed on October 31, The subsidiary Länsförsäkringar EFEL Skadeförsäkring AB was merged with Länsförsäkringar Sak on June 1, Solvency II risk-based regulatory requirements from 2013 The EU reached an agreement on the modernisation of regula- 4 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

5 tory requirements for insurance companies, known as Solvency II, in These new rules place more rigorous demands on companies risk management. Also, the rules stipulate that the requirements for minimum buffer capital placed on insurance companies will be significantly more closely linked to the scope of the company s risks. The regulatory changes are extensive, affect a number of areas and, in many respects, are manifested as substantially more detailed rules than the currently applicable provisions. The rules are expected to come into effect on January 1, Länsförsäkringar AB and its subsidiaries have participated in the Solvency II preparations for several years. Following a preliminary study in 2008, a project on Solvency II preparations has been conducted since the start of An increasing number of employees will be involved in the preparations. The work involves individual preparations and also influencing the content of the new rules. Länsförsäkringar Sak has a positive attitude to the modernisation of the rules for the insurance sector under Solvency II. However, the preparations for Solvency II demand extensive work and expenses. Measures need to be taken in terms of the development of work processes and guidance documents and the management of historical data storage and calculation procedures. The reviews of processes that are underway will lead to enhanced efficiency. The preparatory work for Solvency II is initially focusing on ensuring compliance with the regulations. A standard formula or an internal model can be used to calculate capital requirements under Solvency II. The latter is based on the company s own risks rather than applying more generally as is the case under the standard formula. An internal model is to be approved by the Swedish Financial Supervisory Authority prior to application. Länsförsäkringar Sak intends to have a (partially) internal model approved in a bid to work with measurements of capital requirements that are more consistent with the company s risks than the provisions of the standard formula. New standard for recognition of insurance contracts Exposure Draft IFRS 4 Phase II was published at the end of June 2010 with a period for comment until November 30, The draft proposes a new standard for the recognition of insurance contracts that will replace IFRS 4 Insurance Contracts. The proposal presents the first comprehensive IFRS accounting model for insurance contracts and is expected to have a significant impact on companies issuing insurance contracts. In addition to changes to accounting policies, the proposals may also affect systems, data, processes and broader business aspects. Events after the balance-sheet date No significant events were reported after the balance-sheet date. Expectations regarding future development The market for health insurance is growing and being exposed to intense competition. Länsförsäkringar Sak is experiencing significant growth among its core target groups of small and medium-sized businesses. Far-reaching changes were made to health care insurance at the beginning of 2010 to offer customers reasonably priced insurance in the long term that has stable pricing over time and is simple to use. The changes implemented include improved care guarantees, the abolition of compulsory referrals and the introduction of deductibles, and have increased customer availability and reduced claims costs. The customer survey revealed that customer satisfaction improved compared with the preceding year in terms of service in receiving care and in claims processing. With a balanced health care business and the market s most satisfied customers, Länsförsäkringar Sak has a solid basis to meet intensifying competition. With these measures in place, Länsförsäkringar Sak has set a new standard in the health care insurance market. Also, a new automatic claims processing system for all health care claims was put into production at the end of A written claims report is no longer normally needed from the customer, and no traditional claims processing is required. The efficiency of claims processing is vital to the company s competitiveness since the scope of claims administration previously required major resources. Furthermore, product consolidation continued during the year. Four different life-assurance policies and six different health insurance policies were consolidated to a single life-assurance policy and a single health policy, enabling Länsförsäkringar Sak to be clear in its customer communication and enhance the efficiency of its internal claims adjustment administration and customer service. Länsförsäkringar is taking the first step toward modernising the group life assurance and group health insurance market. The aim is to create insurance policies that are better tailored to current society and thereby increase flexibility and offer sound and secure basic cover. Accordingly, the new group insurance policies have higher amounts insurance and the terms are adapted to the new conditions of modern society. All customers will be offered the new group insurance policies from January 1, Since 2007, Länsförsäkringar has cooperated with the Keep Sweden Tidy Foundation and Stena Recycling to promote recycling and reduce the environmental impact of Sweden s agricultural sector. This partnership enables customers who are covered by Länsförsäkringar s recycling insurance to have the scrap and environmentally harmful waste generated by their agricultural operations collected for recycling or destruction. The amount of scrap and environmentally harmful waste collected in 2010 rose compared with levels in If this trend were to continue, it would mean that the target of the world s cleanest agricultural sector will be achieved this forthcoming year. In 2010, nearly 7,700 tonnes of agricultural scrap and 1.8 tonnes of environmentally harmful waste were collected from Swedish farmers. This work has attracted considerable na- LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 5

6 tional and international interest and is highly appreciated by customers. Recycling insurance reduces the risk of accidents and the impact on the environment, while at the same time enabling customers to dispose of their waste in a safe and environmentally sound manner. Wind power is expanding in Sweden and investments are again accelerating. Länsförsäkringar s concept for wind turbine insurance, which includes recycling insurance, was positively received by the market. However, a recycling insurance solution has not currently been approved as an alternative for guaranteeing the future closure of wind-power turbines, which is limiting progress. Swedish companies are increasingly establishing business activities abroad, which heightens the need for cross-border insurance solutions. Insurance policies for operations conducted outside Sweden are often subject to other rules than those that apply in Sweden, and package solutions that are customary in Sweden may be different abroad. Primarily through its involvement in the International Network of Insurance (INI), Länsförsäkringar is able to provide insurance solutions for customers with foreign risk exposures. Länsförsäkringar can offer competitive insurance solutions in 100 countries through partnerships. The insurance industry appointed an independent industrial injury commission through the Swedish Insurance Federation. The Commission s task is to investigate the possibility of creating a new type of workmens compensation insurance policy that contains drivers for reducing the number of workplace injuries, offers quicker and improved rehabilitation and leads to better coordination between all of the parties involved. The Industrial Injury Commission will perform a detailed study of the current industrial injury system and propose the structure of a new workmens compensation insurance policy. The central premise is ensuring the best interests of the individual s future. The task is to be completed by August 31, Meanwhile, a Social Insurance Inquiry is underway which is charged with the task of studying whether changes should be made to bring about more sustainable sick leave and unemployment insurance policies. Länsförsäkringar Sak is actively following these inquiries since any changes may require the creation of new types of insurance policies for companies and private individuals. Risks and risk management Länsförsäkringar Sak s largest risk exposures are considered to be its investment assets and its commitments in motor third-party liability insurance. From 2008, the claims annuities reserve is sensitive to interest-rate fluctuations. Refer also to Note 2 on page 20. Employees The company s vision and values, combined with the task from the regional insurance companies, serve as a guide for the entire business operations. The joint Human Resources processes are a key component of the governance of Länsförsäkringar Sak and are aimed at ensuring access to competence in the short and long term. Consequently, the joint HR processes also safeguard opportunities for positively developing the company in line with the owners ambitions. Employees participate in a structural business control process, which includes an established business planning model. A performance management model that links the targets for short and long-term employee performance to the objectives of the business plans is in place to connect the business planning process to employee performance. Individual targets for employees are identified in discussions between employees and their managers. Coupled with expected behaviour and based on shared values, these targets comprise the overall performance expectations that are documented in the employee s target contract. Future work duties, career aspirations and professional roles are discussed every year in a bid to make employees more active in the planning of their own skills development and career planning. An employee survey is carried out annually to study employee perceptions of performance conditions. The results of the survey are used both as a benchmark and to further improve performance conditions. A new Remuneration Policy was drawn up during the year. Employees at Länsförsäkringar Sak are to have market-based terms of employment. The structure and level of remuneration should correspond to the company s values, meaning that it should be reasonable, moderate and well-balanced, and also contribute to good ethics and organisational culture, characterised by openness and transparency. The base of the remuneration model comprises fixed remuneration, meaning a fixed cash monthly salary. Target-based remuneration is a supplement to fixed remuneration and may be paid to employees who are not managers, and is currently maximised at SEK 12,000 per year per employee. A basic prerequisite for target-based remuneration is that the Parent Company, Länsförsäkringar AB, posts positive financial results. At least one third of the target-based remuneration is based on exceeding the overall targets of the business plans and a maximum of two thirds on exceeding individual targets. Only fixed salaries are paid to company management and managers. Long-term management supply is ensured by identifying individuals with the drive and capacity to attain senior managerial positions within three years. This approach also enhances equality between women and men in the management structure. An Assessment Center training course was held by the Länsförsäkringar AB Group and some ten employees will undergo a young talent management development programme in Seven trainees were recruited to the Group s trainee programme as project managers and controllers. Long-term and proactive health care activities, health care insurance available to all employees, a range of different 6 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

7 preventive health care activities and the option of exercising during working hours are measures that contributed to total sickness absence totalling only 3.6% (3.8). Environment Länsförsäkringar Sak works actively to reduce the environmental impact of its offices and business activities. The company s direct environmental impact derives primarily from business travel and the consumption of electricity, heating and paper. Recycling insurance and insurance for wind power plants are other ways in which the company promotes the reduction of society s environmental impact. Länsförsäkringar Sak is included in the Parent Company s ISO environmental management system, which guarantees systematic environmental activities. Asset management Länsförsäkringar Sak aims to generate a stable return on the investment assets in the company to achieve favourable profitability and to ensure that the capital base is sufficient in relation to the company s risks. This is important for being able to guarantee, with a high degree of reliability, the commitments made to customers and is achieved by applying an effective and competitive management model that takes risk levels into consideration. Development Länsförsäkringar Sak follows a new management model with an increased focus on total return. The company s strategy involves reducing the active management mandate in markets that are broad, transparent and efficient, and instead implementing passive, simple and more cost-efficient solutions to capture market exposure. This approach is supplemented by taking active risks where it is deemed that managers have prime opportunities to generate surplus returns in terms of less efficient listed and unlisted markets. Risk level Länsförsäkringar Sak is exposed to many different types of risk. In the non-life insurance operations, insurance risk can be divided into three areas: premium risk, reserve risk and disaster risk. The company s earnings are largely governed by the level of return in asset management, meaning that it is important to follow and manage market risk. For further comments concerning risk management, refer to Note 2 Risks and risk management. Management model Länsförsäkringar Sak s portfolio structure for market exposure focuses on selecting the desired distribution of assets in the portfolios. In addition, major importance is attached to how the desired market exposure is to be achieved. Asset management at Länsförsäkringar AB offers considerable expertise in employing other efficient solutions to maintain passive market exposure rather than by using traditional management mandates. For example, this can take place via different types of derivative instruments, which generates added value through reduced management costs and simplified transaction administration. Active work is undertaken to protect the portfolio from different types of risk. The combination of these factors results in a portfolio structure that creates scope for action to capture the market exposure deemed suitable. This means that Länsförsäkringar Sak conducts portfolio management that creates rapid scope for action following changed market conditions at a lower management cost. Organisation and control Länsförsäkringar Sak s Board of Directors adopts policies and instructions for the management of investment assets. This includes the Board continuously remaining informed of the performance of the operations and, in the event of an unsatisfactory performance, deciding on corrective measures. The task of Länsförsäkringar AB s Group-wide Asset Management unit is to conduct asset management activities on behalf of Länsförsäkringar Sak. This mandate includes assuming responsibility for formulating proposals for strategic allocation, proposing management structures and, after decisions are made by the Board, assuming responsibility for implementing and following up these decisions. Asset Management defines the assignments for the asset managers, specifying clear risk levels and yield requirements. The task of the managers is to create the best possible return given the framework and guidelines they have received. This may mean that the managers choose a composition of securities that deviate from that of the portfolio s benchmark index. The outsourced management assignments are evaluated by Asset Management, which regularly analyses the asset managers and management results. Länsförsäkringar Sak now works with several external managers. Earnings and financial position Profit before appropriations and tax for 2010 amounted to SEK 518 M (511). Income from insurance operations amounted to SEK 218 M (375) and the remaining investment income to SEK 300 M (135) (refer also to Profit from financial operations ). Profit from insurance operations Premiums earned after ceded reinsurance rose 14% compared with the preceding year and amounted to SEK 1,754 M (1,539). The main reason for this increase is the merger of the subsidiary Länsförsäkringar EFEL Skadeförsäkring AB. In 2010, business was underwritten in the areas of health, accident, cargo and producer liability insurance, some property insurance, commercial automotive cover for national customers (motor third-party liability and motor hull insurance), assumed reinsurance and recycling insurance. LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 7

8 Claims payments after ceded reinsurance amounted to SEK 1,426 M (1,236), resulting in a claims ratio of 81% (80). As in the preceding year, the claims ratio was affected positively by the run-off profit on older year classes. The claims outcome was favourable throughout the year, except in motor hull insurance which saw a rise in claims due to a severe winter. Since 2004, most motor third-party liability policies have been underwritten by the local regional insurance companies. The provision for claims incurred for motor third-party liability insurance underwritten up to and including 2003 is run off within Länsförsäkringar Sak. Technical reserves, before ceded reinsurance (gross), increased SEK 407 M, while technical reserves for own account declined by SEK 18 M. The change in gross reserves is primarily due to the merger of the subsidiary Länsförsäkringar EFEL Skadeförsäkring AB and the accumulation of reserves in the Länsförsäkringar Alliance s shared reinsurance solution. The decline in reserves for own account was due to the run-off of the provision for claims incurred in motor thirdparty liability insurance (run-off transactions). The reserve run-off result, which can be described as a short-term measurement of the quality of the provision for claims incurred, amounted to SEK 168 M (485), gross, or slightly less than 1% of the provision for claims incurred at the beginning of the year. This run-off profit was primarily attributable to commercial and cargo insurance as well as assumed reinsurance. Investment income transferred from financial operations amounted to SEK 285 M (388). For motor third-party liability insurance, which again remains the line of business with the largest technical reserves and thus the largest investment income, an interest rate of 2.1% (3.5) was used. The insurance operations displayed favourable profitability, although the combined ratio has historically been and remains at a high level, since the incidence of transactions of a long duration is frequent. This means that the investment income transferred to insurance operations is relatively high compared with premiums earned after ceded reinsurance. Operating expenses increased compared with the preceding year and amounted to SEK 396 M (321). The expense ratio was 23% (21). The increase in operating expenses was mainly due to the growth in volumes and costs related to preparation for the introduction of the Solvency II rules. Motor third-party liability insurance also remained a major line of business and recognised profit of SEK 98 M (205). This profit derived from the run-off transactions described above and from the national motor hull insurance transactions that will partly continue to be underwritten within Länsförsäkringar Sak. Assumed reinsurance, comprising active reinsurance business and run-off business, also generated a profit during the year. Internationally assumed transactions continued to post favourable results and the market situation is stable despite transactions being impacted by a number of major market claims during the year. The exposure level of the Länsförsäkringar Alliance s non-life insurance changed only marginally and the reinsurance programme was largely unchanged compared with All insurance classes, except for motor hull insurance, posted positive results. Profit from financial operations The market value of investment assets (excluding shares and participations in Group companies) amounted to SEK 14,358 M (13,814) at year-end. The distribution among various classes of assets is shown in the table on the following page. The total return for 2010 was 4.3% (6.4), while the five-year average was 2.4% (3.9). Interest-bearing assets provided a total return of 3.2% (6.6), while equities generated a return of 2.9% (52.0) and properties 8.3% (8.8). The total return includes a change in the surplus values of property in Group companies. These surplus values are not included in investment income in the income statement. Solvency Solvency capital increased during the year to SEK 3,026 M (2,829). The solvency margin increased to 177% (173). Personnel, salaries and remuneration Information regarding the average number of employees, salaries and remuneration, as well as details concerning salary and other remuneration to senior executives, are provided in Note 34 Employees and staff costs. Information regarding sickness absence and gender distribution in executive management is also provided in Note 34. The Board of Directors adopted a remuneration policy on April 20, 2010 in accordance with the regulations and general advice of the Swedish Financial Supervisory Authority (FFFS 2009:7) regarding remuneration policies in insurance companies, stock exchanges, clearing organisations and institutes for issuing electronic money. Proposed appropriation of profit According to the balance sheet of Länsförsäkringar Sak Försäkringsaktiebolag (publ), the following non-restricted equity is at the disposal of the Annual General Meeting. Retained earnings SEK 434,331,598 Net profit for the year SEK 434,754,766 Total SEK 869,086,364 The Board of Directors and the President propose that SEK 138,000,000 of this profit be distributed to the Parent Company and SEK 731,086,364 be carried forward. 8 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

9 DISTRIBUTION OF INVESTMENT ASSETS, LÄNSFÖRSÄKRINGAR SAK (INCLUDING PROPERTIES IN GROUP COMPANIES) Amounts in SEK M Market value, % Market value, % Investments Jan. 1, 2010 Dec. 31, 2010 Interest-bearing 10, , Shares and change in strategic holdings , Property 2, , Hedge 3, Total 13, , LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 9

10 Five-year summary RESULTS, SEK M Premiums earned (after ceded reinsurance) 1,158 1,340 1,473 1,539 1,754 Investment income transferred from financial operations Claims payments (after ceded reinsurance) 916 1,094 1,156 1,236 1,426 Operating expenses Other income and expenses Technical result for insurance operations Remaining investment income , Profit/loss before appropriations and tax 591 1,045 2, Net profit/loss for the year , Premium income (after ceded reinsurance) Non-life insurance 1,148 1,332 1,601 1,638 1,714 FINANCIAL POSITION, SEK M Investment assets 16,564 16,721 13,326 13,444 12,972 Technical reserves (after ceded reinsurance) 12,461 12,705 12,539 12,234 12,216 Solvency capital Equity 1,718 2, ,073 Deferred tax Untaxed reserves 1,229 1,479 1,139 1,139 1,139 Surplus values 811 1,102 1,049 1,098 1,000 Solvency capital 3,890 4,852 2,061 2,829 3,026 Solvency margin, % Capital base 4,060 4,238 2,513 2,909 2,774 Required solvency margin Capital base for the insurance group 1,970 2,409 2,614 Required solvency margin for the insurance group KEY FIGURES Insurance operations Claims ratio Expense ratio Combined ratio Asset management, % Direct yield Total return, including properties in Group companies Direct yield Direct yield refers to the balance of interest income, interest expense, dividends on shares and participations, and the surplus/deficit on property for the assets encompassed by the investment principles in relation to the average value of these assets during the year. Total return ratio Total return ratio refers to the sum of the direct yield and changes in the value of the investment portfolio for the assets encompassed by the investment principles, including direct transaction costs but excluding management costs, in relation to the average value of these assets during the year. 10 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

11 Financial statements Contents Page Income statement Performance analysis Balance sheet Statement of changes in shareholders equity Cash-flow statement Note 1 Accounting policies Note 2 Risks and risk management Note 3 Premium income Note 4 Investment income transferred from financial operations Note 5 Other technical revenue and expenses Note 6 Claims payments Note 7 Operating expenses Note 8 Investment income, revenue Note 9 Investment income, expenses Note 10 Unrealised gains and losses on investment assets Note 11 Tax on net profit for the year Note 12 Goodwill Note 13 Other intangible assets Note 14 Shares and participations in Group companies Note 15 Loans to Group companies Note 16 Shares and participations in associated companies Note 17 Shares and participations Note 18 Bonds and other interest-bearing securities Note 19 Derivatives Note 20 Receivables, direct insurance Note 21 Other receivables Note 22 Financial assets and liabilities by category and their fair value Note 23 Prepaid acquisition costs Note 24 Other prepaid expenses and accrued income Note 25 Technical reserves Note 26 Deferred tax Note 27 Other provisions Note 28 Liabilities, direct insurance Note 29 Other liabilities Note 30 Other accrued expenses and deferred income Note 31 Anticipated recovery and settlement periods Note 32 Pensions Note 33 Memorandum items Note 34 Employees and staff costs Note 35 Fees and remuneration to auditors Note 36 Disclosures on related parties Note 37 Supplementary disclosures on income-statement items by insurance class LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 11

12 Income statement TECHNICAL RECOGNITION OF NON-LIFE INSURANCE OPERATIONS, SEK M Premiums earned (after ceded reinsurance) Premium income Note 3 3, ,886.8 Premiums for ceded reinsurance 2, ,248.6 Change in provision for unearned premiums and unexpired risks Reinsurers portion of change in provision for unearned premiums and unexpired risks , ,538.9 Investment income transferred from financial operations Note Other technical revenue (after ceded reinsurance) Note Claims payments (after ceded reinsurance) Claims paid Before ceded reinsurance 2, ,677.7 Reinsurers portion ,007.1 Note 6 1, ,670.6 Change in provision for claims outstanding Before ceded reinsurance Reinsurers portion Claims payments (after ceded reinsurance) 1, ,235.7 Operating expenses Note TECHNICAL RESULT, NON-LIFE INSURANCE OPERATIONS NON-TECHNICAL RECOGNITION Technical result, non-life insurance operations Investment income, revenue Note Unrealised gains on investment assets Note Investment income, expenses Note Unrealised losses on investment assets Note Investment income transferred to non-life insurance operations Profit before appropriations and tax Appropriations Profit before tax Tax on net profit for the year Note Net profit for the year Statement of comprehensive income Net profit for the year Other comprehensive income Total comprehensive income LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

13 Performance analysis Direct in- Direc in- Household Commercial Motor third- Marine, surance surance Assumed Accident and and and Motor party air and Swedish foreign re- SEK M Total health homeowner property hull liability cargo TFA risks risks insurance Technical result, non-life insurance operations Premiums earned (after ceded reinsurance) 1, , Investment income transferred from financial operations Other technical revenue (after ceded reinsurance) Claims payments (after ceded reinsurance) 1, ,3 1, Operating expenses Technical result, non-life insurance operations, , Technical result, non-life insurance operations, Gross run-off loss, , Technical reserves, before ceded reinsurance Provision for unearned premiums and unexpired risks Provision for claims outstanding 17, , , , ,462.6 Total technical reserves, before ceded reinsurance 18, , , , , ,504.7 Reinsurers portion of technical reserves Provision for unearned premiums and unexpired risks Provision for claims outstanding 6, ,606.9 Total reinsurers portion of technical reserves 6, ,620.7 Notes to performance analysis Direct in- Direct in- Household Commercial Motor third- Marine, surance insurance Assumed Accident and and and Motor party air and Swedish foreign re- SEK M Total health homeowner property hull liability cargo TFA risks risks insurance Note A Premiums earned (after ceded reinsurance) Premium income 3, , ,354.1 Premiums for ceded reinsurance 2, ,913.7 Change in provision for unearned premiums and unexpired risks Reinsurers portion of change in provision for unearned premiums and unexpired risks Note B Claims payments (after ceded reinsurance) Claims paid Before ceded reinsurance 2, , ,3 1, ,045.9 Reinsurers portion Change in provision for claims outstanding Before ceded reinsurance , Reinsurers portion , LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 13

14 Balance sheet SEK M Dec. 31, 2010 Dec. 31, 2009 ASSETS Intangible assets Goodwill Note Other intangible assets Note Investment assets Investments in Group companies and associated companies Shares and participations in Group companies Note 14 1, ,836.1 Loans to Group companies Note 15 1, ,865.3 Shares and participations in associated companies Note Other financial investment assets Shares and participations Note Bonds and other interest-bearing securities Note 18 8, ,733.8 Derivatives Note Other financial investment assets Deposits with companies that have ceded reinsurance , ,444.4 Reinsurers portion of technical reserves Unearned premiums and unexpired risks Claims outstanding 6, ,664.7 Note 25 6, ,912.6 Receivables Receivables, direct insurance Note Receivables, reinsurance Deferred tax Note Other receivables Note 21 1, , ,361.3 Other assets Cash and bank balances Prepaid expenses and accrued income Accrued interest and rental income Prepaid acquisition costs Note Other prepaid expenses and accrued income Note SEK M Dec. 31, 2010 Dec. 31, 2009 EQUITY, PROVISIONS AND LIABILITIES Equity Share capital Statutory reserve Retained earnings Net profit for the year , Untaxed reserves Contingency reserve 1, , , ,138.8 Technical reserves (before ceded reinsurance) Unearned premiums and unexpired risks Claims outstanding 17, ,348.4 Note 25 18, ,146.1 Other provisions Pensions and similar commitments Current tax Note Other provisions Note Deposits from reinsurers Liabilities Liabilities, direct insurance Note Liabilities, reinsurance Derivatives Note Other liabilities Note , Accrued expenses and deferred income Other accrued expenses and deferred income Note TOTAL EQUITY, PROVISIONS AND LIABILITIES 22, ,477.7 Memorandum items Note 33 Pledged assets 13, ,371.6 Contingent liabilities TOTAL ASSETS 22, , LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

15 Statement of changes in shareholders equity Changes in equity Share Statutory Retain Profit for Total capital reserve earnings the year equity SEK M Opening equity, December Group contributions paid/received Net profit for the year/ comprehensive income Closing equity, December 31, Opening equity, January 1, Dividends to Parent Company Merger difference Group contributions paid/received Net profit for the year/ comprehensive income Closing equity, December 31, ,073.1 Number of shares at a par value of SEK 100 each 2,000,000 Share capital and the statutory reserve are classified as restricted. SUPPLEMENTARY INFORMATION TO CASH-FLOW STATEMENT SEK M Interest paid and received and dividends received Dividends received Interest received Interest paid Adjustment for non-cash items Depreciation/amortisation and impairment of assets Unrealised gains/losses on investment assets Technical reserves after ceded reinsurance 459, Pension provisions Other provisions Cash and cash equivalents Cash and bank balances* of which, Länsförsäkringar Bank Receivables from Group companies Länsförsäkringar Bank Länsförsäkringar AB, Group bank account , * For 2009, the balance for Länsförsäkringar Bank is included in Cash and bank balances. Cash-flow statement SEK M Operating activities Profit before tax Adjustment for non-cash items Tax paid Cash flow from operating activities before changes in working capital Cash flow from changes in working capital Investments in investment assets, net 1, Increase( )/Decrease(+) in operating receivables Increase(+)/Decrease( ) in operating liabilities Cash flow from operating activities Investing activities Shareholders contribution paid 60.0 Dividend from subsidiaries and associated companies Divestment/merger of subsidiaries Change in loans issued Investments in intangible assets Cash flow from investing activities Financing activities Dividends to Parent Company Group contributions paid/received Loans granted Note Cash flow from financing activities Net cash flow for the year Cash and cash equivalents, January Cash and cash equivalents, December 31 1, LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 15

16 Notes to the financial statements NotE 1 ACCOUNTING POLICIES Corporate form The Annual Report for Länsförsäkringar Sak Försäkringsaktiebolag (publ), Corporate Registration Number , domiciled in Stockholm, pertains to the fiscal year January 1 December 31, The company s address is Tegeluddsvägen 11 13, SE Stockholm. Länsförsäkringar Sak is a wholly owned subsidiary to Länsförsäkringar AB (publ), Corporate Registration Number , in which the consolidated financial statements are prepared. Compliance with standards and legislation The Annual Report was prepared in accordance with the Annual Accounts Act for Insurance Companies (ÅRFL), the regulations and general advice of the Swedish Financial Supervisory Authority concerning annual reports in insurance companies (FFFS 2008:26 and FFFS 2009:12) and reporting recommendation RFR 2 issued by the Swedish Financial Reporting Board. Länsförsäkringar Sak applies legally restricted IFRS, meaning the international financial reporting standards adopted for application with the restrictions stipulated by RFR 2, FFFS 2008:26 and FFFS 2009:12. This means that all IFRS and interpretation statements approved by the EU are applied as far as possible within the framework of Swedish legislation and taking into consideration the connection between accounting and taxation. The accounting policies applied below have been applied consistently for all periods presented in this Annual Report. The company s functional currency is Swedish kronor (SEK) and the financial statements are presented in SEK. All amounts, unless otherwise stated, are rounded to the nearest thousand. Assets and liabilities are recognised at cost, except for certain financial assets and liabilities that are measured at fair value. Financial assets and liabilities measured at fair value comprise derivative instruments, financial assets classified as financial assets measured at fair value in profit and loss or property. Judgments and estimates in the financial statements The preparation of the financial statements in accordance with legally restricted IFRS requires that management make a number of judgments and estimates, and make assumptions that affect the application of the accounting policies and the recognised amounts of assets, liabilities, income and expenses. These estimates and judgments are based on historical experience and a range of other factors considered reasonable given the prevailing circumstances. The assumptions and judgments that form the basis of the estimates and judgments are reviewed regularly. The valuation of the company s provisions is described in the section below concerning the recognition of insurance contracts and in Note 2, which provides information on risks in the operations. Changed accounting policies (New IFRSs and interpretations that have not yet been applied.) New international accounting standards, amendments to standards and interpretations of these standards that take effect from 2011 will not be applied in advance but will be applied once they are applicable. The assessment is that none of these changes will have any significant impact on Länsförsäkringar Sak s earnings or position when the new regulations are applied. Foreign currency Transactions in foreign currency are translated to SEK when they are recognised in the accounts at the exchange rate on the date of the transaction. Assets and liabilities in foreign currency are translated to SEK by applying the exchange rate on the balance-sheet date. Unrealised exchange-rate differences that arise as a result are recognised in profit and loss as exchange-rate gains/losses under earnings for asset management. The currency futures utilised to financially hedge currency exposure in the balance sheet are measured at fair value and effects on earnings are recognised under interest income and exchange rate gains/losses. Related parties Related legal entities include the Länsförsäkringar AB Group s and the Länsförsäkringar Liv Försäkrings AB Group s companies, all associated companies, Länsförsäkringar Mäklarservice AB and the 24 regional insurance companies. Pricing for service activities within the Länsförsäkringar Alliance is based on direct and indirect costs. A price list is established in conjunction with the budget process. Overall, pricing is intended to distribute costs fairly within the Länsförsäkringar Alliance based on consumption. Joint development projects and joint service are financed collectively and invoiced based on an established distribution key. Refer to Note 36 Disclosures on related parties. Insurance contracts Insurance contracts are contracts in which Länsförsäkringar Sak undertakes a significant insurance risk for the policyholder by agreeing to compensate the policyholder if a predetermined, insured event were to occur. In accordance with IFRS 4 Insurance Contracts, insurance contracts are divided into either insurance contracts or non-insurance contracts based on insurance risk. Insurance products that do not involve a sufficiently significant level of insurance risk are to be classified as non-insurance contracts. An analysis of these was performed within Länsförsäkringar Sak and resulted in most insurance contracts being classified with insurance risk. Some insurance contracts of minor value were identified for which the risk is not transferred to another party. Since these are of marginal value, all contracts have been classified according to the concept of materiality as insurance contracts. 16 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

17 NotE 1 ACCOUNTING POLICIES, cont. Länsförsäkringar Sak performs a loss survey of connections in its insurance provisions to ensure that the carrying amounts of the provisions are sufficiently high for the expected future cash flow. Premium income Premium income is recognised as the total gross premium for direct insurance and assumed reinsurance deposited or can be credited to the company for insurance contracts for which the insurance period commenced prior to the end of the fiscal year. Premiums for insurance periods commencing after the end of the fiscal year are also recognised as premium income, if according to contract they fall due for payment during the fiscal year. Gross premium is the contractual premium for the entire insurance period after deductions for standard customer discounts. Renewal premiums that are not confirmed by the policyholder and premiums for recently signed insurance contracts are included at the amounts at which they are expected to be received. Cancellations reduce the premium income as soon as the amount is known. Additional premiums are included at the amounts at which they are expected to be received. Premium income is recognised excluding tax and other public fees charged to the insurance premium. Premiums earned correspond to the portion of the premium income that is earned. Unearned premiums are recognised under Provision for unearned premiums. Technical reserves Technical reserves comprise Provision for unearned premiums and unexpired risk and Provision for claims outstanding. Provision for unearned premiums and unexpired risks Provision for unearned premiums is designed to cover the expected claims and operating expenses during the remaining time to maturity of insurance contracts already in force. The calculation includes an estimate of the expected costs for claims that may occur during the remaining term of the insurance policies and the management costs during the period. Normally, the provision is strictly proportional to time, referred to as a pro rata temporis calculation. For certain products with small volumes, unearned premiums are not calculated as a share of the premium income. The cost estimate is based on Länsförsäkringar Sak s experience, but consideration is also given to both the observed and forecast trend in relevant costs. Unexpired risks refers to the risk that the payment requirements of the insurance contracts and the costs will not be covered by unearned premiums and expected premiums after the end of the fiscal year. If the premium level of insurance contracts already entered into is deemed to be insufficient, a provision is made for unexpired risks. The change for the period in Provision for unearned premiums and unexpired risks is recognised in profit and loss. Changes attributable to the translation of the provision items to the exchange rate on the balance-sheet date are recognised as exchange-rate gains or exchange-rate losses under the item Investment income. Provision for claims outstanding The provision for claims outstanding should cover anticipated costs for claims for which final settlement has not been completed, including claims that have been incurred but have not yet been reported to the company. The provision includes anticipated future cost increases plus all expenses for claims adjustment and is based on statistical methods for most claims. An individual assessment is made in the case of major claims and claims involving complex liability conditions. With the exception of accident and health insurance for children and claims annuities, the provision for claims outstanding is not discounted. In the case of accident and health insurance for children, a business for which active operations are transferred to the regional insurance companies, discounting at a rate of 3.0% is applied. The provision for claims annuities is discounted in line with customary life assurance methods and measured at market value using current interest rates under FFFS 2008:23. The effect of interest-rate revaluations is recognised as a financial expense or income. For motor third-party liability insurance, provisions are made for claims adjustment costs according to the unit cost principle. Provisions for claims adjustment costs for other types of insurance are made proportionally against the provision for claims incurred. The provision for claims incurred but not reported (IBNR) encompasses costs for claims that have been incurred but are unknown to the company. The amount is an estimate based on historical experience and claims outcomes. The change in claims outstanding for the period is recognised in profit and loss. Changes attributable to the translation of the provision items to the exchange rate on the balance-sheet date are recognised as exchange-rate gains or exchange-rate losses under the item Investment income. Prepaid acquisition costs for insurance contracts Selling expenses that have a distinct link to signed insurance contracts are recognised as assets, prepaid acquisition costs, and are depreciated over their useful lives. A condition for capitalisation is that the acquisition costs are attributable to a certain insurance contract, or homogenous groups of contracts that can be followed up, and are deemed to generate a margin that covers at least the acquisition costs intended to be capitalised. The selling expenses that are to be capitalised are commission expenses. In the non-life insurance operations, the capitalised cost is allocated in a manner corresponding to the allocation of unearned premiums. The depreciation period does not exceed 12 months. Operating expenses All operating expenses are classified in profit and loss according to the following functions: acquisition, claims adjustment, administration, commission and profit shares in ceded reinsurance, invest- LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 17

18 NotE 1 ACCOUNTING PRINCIPLES, cont. ment income expenses and, in certain cases, other technical expenses. Operating expenses for claims adjustment are recognised under Claims payments paid. Operating expenses for financial management are recognised under Investment income, expenses. Reinsurance Contracts signed between Länsförsäkringar Sak and reinsurers through which the company is compensated for losses on contracts issued by the company and that meet the classification requirements for insurance contracts as stated above are classified as ceded reinsurance. Assumed reinsurance is classified in the same manner. For ceded reinsurance, the benefits to which the company is entitled under the reinsurance contract are recognised as the reinsurers portion of technical reserves and deposits with companies that have ceded reinsurance. Receivables from and liabilities to reinsurers are valued in the same manner as the amounts linked to the reinsurance contract and in accordance with the conditions of each reinsurance contract. Liabilities in reinsurance primarily comprise settlements against regional insurance companies and premiums to be paid for reinsurance contracts. The reinsurers portion of technical reserves corresponds to the reinsurers responsibility for technical reserves in accordance with signed contracts. Länsförsäkringar Sak assesses the impairment requirements of assets for reinsurance contracts twice a year. If the recoverable amount is lower than the carrying amount of the asset, the asset is impaired to the recoverable amount and the impairment loss is expensed in profit and loss. Investment income Investment income transferred from financial operations The insurance operations have been assigned an interest totalling half the premiums earned after ceded reinsurance and the average of opening and closing provisions for claims outstanding after ceded reinsurance during the year. The interest rate is risk-free interest and for 2010 was set at 1.8% for short-term transactions and 2.1% for long-term transactions. Investment income, revenue The item Investment income, revenue refers to the return on investment assets and encompasses rental income from land and buildings, dividends on shares and participations, interest income, exchange-rate gains and capital gains. Investment income, expenses Costs for investment assets are recognised under Investment income, expenses. This item includes operating expenses for land and buildings, asset management expenses, interest expense, exchange-rate losses and capital losses. Realised and unrealised changes in value For investment assets measured at fair value, the capital gain is the positive difference between sales price and cost. For interest-bearing securities, cost comprises amortised cost. Tax Tax is recognised in accordance with IAS 12. Tax on net profit for the year comprises current tax and deferred tax. Tax is recognised in profit and loss, except when a transaction with a tax effect is recognised directly against equity. Current tax is tax that shall be paid or received in the current year. This also includes adjustments of current tax attributable to prior periods. Deferred tax is calculated in accordance with the balancesheet method, based on temporary differences between carrying amounts and tax bases of assets and liabilities. The amounts are calculated on the basis of how the temporary differences are expected to be settled and applying the tax rates and tax rules established or announced on the balance-sheet date. Deferred tax assets on deductible temporary differences and taxloss carryforwards are only recognised to the extent that it is likely that they will result in lower tax payments in the future. Intangible assets Goodwill Goodwill represents the difference between the cost of the acquisition of operations and the fair value of acquired identifiable assets, assumed liabilities and contingent liabilities. Goodwill is measured at cost less any accumulated impairment. Goodwill is distributed to cash-generating units and is tested for impairment at least once annually. The useful life has been set at five years. Other intangible assets Other intangible assets are recognised at cost with deductions for accumulated amortisation according to plan. Acquired intangible fixed assets are amortised from the acquisition date. The asset comprises a customer register for the products in accident and health insurance for adults, group accident insurance and group health insurance, and acquisitions of IT systems. For proprietary software, amortisation commences when the system or part of the system is put into use. The assets comprise proprietary software that is deemed to be of material value for the operations in the coming year. Only expenses related to new development and major system changes are capitalised. Capitalised development expenditures are amortised from the date on which the asset was utilised in production and over its estimated useful life. Useful life is set at five years, except for the customer register for group accident and group health insurance, which has a useful life of eight years. If, at the accounting year-end, there is an indication that the value according to plan of an intangible asset is higher than its recoverable amount, an assessment is made of the asset s recoverable amount. Recoverable amount refers to the higher of the asset s net selling price and its value in use. If the established recoverable amount is less than the carrying amount, the asset s carrying amount is impaired to the recoverable amount. 18 LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB

19 NotE 1 ACCOUNTING POLICIES, cont. Subsidiaries and associated companies Participations in subsidiaries and associated companies are recognised at cost. Financial instruments Financial instruments recognised in the balance sheet include, on the asset side, accounts receivable, shares and other equity instruments, loan receivables, interest-bearing securities and derivatives. Accounts payable, loan liabilities and derivatives are found on the liabilities side. Classification and valuation The cost of a financial instrument classified as a financial asset recognised at fair value in profit and loss comprises the purchase price, excluding transaction costs. Accordingly, transaction costs for these instruments are expensed directly as asset management expenses. For other financial instruments, cost corresponds to the instrument s purchase price, including transaction costs. After the instrument has been acquired, the recognition and valuation of financial instruments depends on how the instrument is classified according to the following. Financial assets measured at fair value in profit and loss Financial instruments in this category are continuously measured at fair value, with changes in value recognised in profit and loss. This includes derivatives with positive fair values. Financial instruments listed on an active market For financial instruments listed on an active market, fair value is determined based on the listed buying-rate of the asset on the balance-sheet date with no additions for transaction costs on the acquisition date. A financial instrument is considered to be listed on an active market if listed prices are readily available on an exchange, from a trader, broker or industry organisation and these prices represent actual and regularly occurring market transactions based on commercial terms. Financial instruments not listed on an active market If the market for a financial instrument is not active, the company determines the fair value by using a valuation technique. The valuation techniques applied are based on market data as far as possible. Valuation techniques are used for derivative instruments (OTC derivatives). The valuation techniques used for OTC derivatives comprise analyses of discounted cash flows. The valuation techniques applied are calibrated such that on initial recognition the fair value amounts to the transaction price and changes in fair value are subsequently recognised continuously based on changes that occur in the underlying market-risk parameters. Unlisted shares are recognised at fair value according to the valuation principles applied by industry organisations in Europe and the US. The item Shares and participations also includes the asset class Alternative investments, which comprise units in funds that buy, develop and sell unlisted companies (private equity) and hedge funds. Valuation data is obtained from the various funds and valuation complies with the guidelines of the European Private Equity and Venture Capital Association. Derivatives Derivative instruments are recognised at fair value based on externally obtained price information. Shares and interest-bearing securities Shares are measured at fair value. Fair value pertains to the sales value on the balance-sheet date. For shares listed on an authorised exchange or marketplace, the sales value normally pertains to the most recent buying-rate on the balance-sheet date or, if this is not available, the most recently listed price paid. Bonds and other interest-bearing securities are also measured at fair value according to the most recently listed buying-rate. Capital gains/losses on bonds and other interest-bearing securities are calculated as the difference between sales value and amortised cost. In the calculation of amortised cost, the difference between cost and exercise price are allocated in profit and loss over the remaining term. The change in amortised cost is recognised net under Interest income. Unrealised changes comprise the difference between fair value and amortised cost. Other interest-bearing assets and liabilities Other receivables are measured at fair value. Foreign receivables are valued in their original currency to be subsequently translated at the closing day rate. Exchange-rate differences that arise are recognised net in profit and loss as exchange-rate gains/losses. Loan receivables and accounts receivable Loans receivable and accounts receivable are financial assets that are not derivatives, that have fixed or fixable payments and that are not listed on an active market. These assets are measured at amortised cost. Accounts receivable and loan receivables are recognised in the amount at which they are expected to be received, meaning after deductions for impaired loans. Financial liabilities measured at fair value in profit and loss This category of instrument comprises derivatives with negative market values. All derivatives are classified as held for trading. Financial liabilities held for trading are included in the category of financial liabilities measured at fair value, with changes in value recognised in profit and loss. Other financial liabilities Other financial liabilities (Borrowing and other financial liabilities, for example, accounts payable) measured at amortised cost. Cash and bank balances Cash and cash equivalents comprise cash funds and immediately available balances at banks and similar institutions. The Group account was classified as a receivable from the Parent Company and is included in the line Other receivables. LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB 19

20 NotE 1 ACCOUNTING POLICIES, cont. Group contributions Group contributions are recognised in accordance with UFR 2. Group contributions are recognised according to financial implication. This entails that Group contributions that have been paid and received with the aim of minimising the Group s total tax are recognised directly against retained earnings after deductions for their actual tax effect. Untaxed reserves Changes in untaxed reserves are recognised, according to Swedish practice, in the profit and loss of each company under appropriations. The accumulated value of the provisions is recognised under the heading Untaxed reserves in the balance sheet, of which 26.3% can be considered to be deferred tax liabilities and 73.7% as restricted equity. The deferred tax liabilities can be described as interest-free liabilities with an undetermined duration. Untaxed reserves are offset, where appropriate, against loss carryforwards or are subject to taxation when they are dissolved. Contingency reserve The contingency reserve is a collective contingency-related strengthening of technical reserves. Access is limited and requires official permission in certain cases. Pensions Pensions through insurance Defined-contribution pension plans are plans according to which the company pays fixed contributions to a separate legal entity and does not have a legal or informal obligation to pay additional contributions. The Group s payments of defined-contribution plans are recognised as expenses during the period in which the employee performed the services to which the contributions refer. Primarily, contributions to the Insurance Industry s Pension Fund (FPK) are recognised here. This plan encompasses all employees except for a few individuals who have individual solutions. The pension agreement for the insurance industry, the FTP plan, through insurance with the Insurance Industry s Pension Fund (FPK) is a multi-employer defined-benefit pension plan. According to IAS 19 Employee Benefits, this pension plan entails that a company shall, as a rule, recognise its proportional share of the defined-benefit pension commitment and the plan assets and expenses associated with the pension commitment. Disclosure shall also be presented in the accounts according to the requirements for defined-benefit pension plans. FPK is currently unable to provide necessary information which is why the pension plans above are recognised as a defined-contribution plan in accordance with item 30 of IAS 19. Also, no information is available on surpluses and deficits in the plan or whether these surpluses and deficits would then affect the contributions for the plan in future years. Contingent liabilities Contingent liabilities are recognised when a commitment exists that has not been recognised as a liability or provision because it is not likely that an outflow of resources will be required. Cash-flow statement Cash-flow statements are prepared in accordance with the indirect method. The recognised cash flow includes only transactions that involve receipts or payments. NotE 2 RISKS AND RISK MANAGEMENT Conducting business activities involves risk-taking. Knowledge about risks is a core area of expertise in the insurance industry. An increasingly sophisticated and changeable financial market, and more detailed public regulations, impose more and more rigorous demands on financial companies and their risk management, in particular. The ultimate owners of Länsförsäkringar Sak are also the company s customers. Accordingly, activities to govern, manage and control the business operations risks are of immediate importance to customers and provide unequivocal customer value. Focus and aims of risk management Risks constitute a significant aspect of Länsförsäkringar Sak s operational environment and business activities. To manage the risks, Länsförsäkringar Sak has clearly defined strategies and areas of responsibility, together with a strong commitment to the riskmanagement process. The main purpose of risk management is to THE FOLLOWING SUMMARY PROVIDES AN OVERVIEW OF LÄNSFÖRSÄKRINGAR SAK S RISK EXPOSURE SEK billion Dec. 31, 2010 Change from Dec. 31, 2009 Dec. 31, 2010 Change from Dec. 31, 2009 Investments Equity Shares and participations Untaxed reserves Interest-bearing assets Technical reserves (gross) Derivatives Motor third-party liability Other investment assets Commercial and property Loans to Group companies Accident and health Assumed reinsurance Other insurance classes Reinsurers Other liabilities Other assets Total assets Total Equity and Liabilities LÄNSFÖRSÄKRINGAR SAK FÖRSÄKRINGS AB